Key Takeaways
The rapid expansion of data centers is creating new demand not only for energy but also for water, positioning produced water as a potentially valuable industrial resource rather than solely a byproduct of oil and gas operations.
Existing water midstream infrastructure in regions like the Permian Basin is already highly developed and may be repurposed to support data center cooling needs, enabling integrated energy and water solutions.
The convergence of natural gas, produced water, and digital infrastructure could reshape valuation frameworks by introducing more stable, long-term industrial demand streams and encouraging coordinated infrastructure development.
In last week’s blog, Part I of this two-part series, we examined how the rapid expansion of hyperscale data centers and artificial intelligence workloads is creating a structural demand outlet for associated natural gas, transforming basin-level supply into infrastructure-backed opportunity. Yet power is only one side of the equation. As digital infrastructure scales in energy-producing regions such as the Permian Basin, another critical input—water—is emerging as another important strategic consideration. In this second installment, we explore how oilfield produced water, long managed as an operational byproduct of hydrocarbon development, may evolve into a differentiated industrial resource, expanding the role and valuation framework of water midstream assets within this emerging energy–digital nexus.
Produced Water and Digital Infrastructure: Expanding the Strategic Role of Water Midstream Assets
In Part I of this blog series, we examined how data center growth may provide a compelling demand outlet for associated natural gas. The second dimension of this evolving theme involves oilfield produced water - a normal byproduct of oil and gas production that is assuming a broader strategic role.
Produced water, or saltwater, accompanies oil and gas production in substantial volumes. The U.S. upstream sector has developed extensive infrastructure to gather, recycle, and dispose of this water safely and efficiently. Increasingly, that infrastructure may serve additional industrial purposes. As data center development expands in regions such as West Texas and southeastern New Mexico, the intersection between data center water demand and produced water supply merits attention.
The Scale and Sophistication of Water Infrastructure
In mature basins, water-to-oil ratios can exceed 3:1, and in some fields are much higher. Over time, the industry has built comprehensive water midstream systems, including extensive gathering pipeline networks, recycling facilities, treatment systems, and permitted disposal wells. This infrastructure is not theoretical - it is already highly developed and capital intensive.
Investment groups such as Five Point Infrastructure, LLC, through affiliated businesses including PowerBridge, LLC and WaterBridge, LLC, have advanced integrated Permian data center site strategies that contemplate coordinated power and water solutions. These efforts illustrate how existing water midstream capabilities may be leveraged alongside new digital infrastructure.
Data Centers and Cooling Requirements
Data centers generate substantial heat and require effective cooling systems to maintain performance and reliability. Depending on design, these facilities require substantial volumes of water to support cooling and operational dependability. Research from the Houston Advanced Research Center indicates that data center cooling already accounts for 25 billion gallons of water use annually, with projections suggesting that demand in Texas alone could reach 161 billion gallons per year by 2030, underscoring the increasing need for scalable, non-potable water supply solutions. In water-constrained regions, access to reliable, non-potable industrial water sources can influence siting decisions (Texas Water Development Board). Produced water, once appropriately treated, may represent a viable alternative supply source.
Several industry participants are exploring this pathway. For example, NGL Water Solutions Permian LLC - a subsidiary of NGL Energy Partners LP (NYSE: NGL) - is pursuing initiatives in the Permian Basin involving large-scale produced water treatment and desalination concepts in coordination with industrial power users. Similarly, companies such as International Chemstar Incorporated (dba Chemstar WATER) have positioned advanced treatment solutions specifically around the anticipated growth of hyperscale data centers in West Texas. While treatment requirements vary depending on cooling system specifications, the technical building blocks of gathering, treatment, and delivery already exist at scale within the oilfield services and water midstream sectors.
Reframing the Asset Base
Water midstream businesses have traditionally been valued based on volumetric throughput, acreage dedications, and exposure to drilling activity.
If portions of treated water volumes are redirected toward industrial customers with long planning horizons, revenue streams may diversify. Industrial water demand tied to digital infrastructure would certainly not fluctuate with drilling and production activity. From a valuation standpoint, diversified customer bases and longer-duration contracts have a direct impact on risk assessment and discount rate assumptions.
As with gas-to-power projects, water contract structure remains central with particular focus on duration and renewal provisions, pricing mechanisms, volume commitments, and credit quality of counterparties. Careful structuring is essential to ensure alignment between infrastructure investment and long-term demand.
Integrated Energy and Water Corridors
The most compelling opportunities may arise where natural gas monetization and produced water reuse are integrated within a coordinated development corridor. In such configurations associated gas fuels co-located generation, treated produced water supports cooling needs, and data centers benefit from proximity to both energy and water infrastructure. This integrated approach can enhance overall project economics by leveraging shared infrastructure and coordinated planning.
For energy companies, it represents an extension of core competencies including resource development, infrastructure buildout, and operational execution into adjacent industrial applications.
A Broader Industrial Alignment
The convergence of oilfield infrastructure and digital infrastructure underscores a broader point: the U.S. oil and gas sector remains deeply integrated with the nation’s economic growth. Abundant natural gas supports power generation. Extensive water infrastructure supports industrial processes. Operational expertise supports large-scale project execution. As digital demand accelerates, these foundational capabilities will prove to be increasingly valuable.
The relationship between data centers, natural gas, and produced water reflects not only technological change, but also the adaptability and resource depth of the U.S. energy sector. As capital markets evaluate these developments, careful underwriting and measured optimism will remain the appropriate framework.
Mercer Capital has its finger on the pulse of both the upstream market and the oilfield service space. As the oil and gas industry evolves through these pivotal times, we take a holistic perspective to bring you thoughtful analysis and commentary regarding the full hydrocarbon stream. This includes E&P operators, mineral aggregators, and ancillary service companies crucial to starting and maintaining the stream’s flow. For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.